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Fixed Rate Loans: The Pros and Cons of Locking It In

Home ownership is a big step, and now is a great time to take it. With low interest rates and a variety of lending options available, owning your own home is an accessible dream. Most buyers rely on a mortgage loan to finance their purchase and, just like you will search for the perfect type of home, you should take the time to search for the perfect type of loan. Lenders typically offer consumers the choice between fixed rate mortgages and variable or adjustable rate mortgages. With a fixed rate mortgage, the interest rate is set at the origination of the loan and the rate does not change over the life of the mortgage. This means that the monthly payment stays the same for the duration of the loan. With an adjustable rate mortgage, the interest rate fluctuates according to a benchmark index, which causes monthly payments to vary over the life of the loan. Fixed rate mortgage loans are the most common because they are simple to understand and less risky than adjustable rate loans. Let’s take a closer look at the characteristics of fixed rate home loans.

How are Fixed Rate Loans Structured?

Fixed rates are the most popular types of home loans because of the stability that they offer buyers. Fixed rate mortgages are generally available in 15, 20 and 30 year options, with 30-year loans as the most popular option.

A 15-year mortgage carries a lower interest rate, but monthly payments will be higher because the loan amount is compressed into only 180 payments, versus 240 payments on the 20-year mortgage and 360 payments on the 30-year loan. A 15-year mortgage allows you to build equity faster because you dive into payments on the principal amount much quicker. The 15-year loan is a great option if you can afford it. However, because your monthly payments will be much higher, it’s more difficult to qualify for the 15-year loan. For that reason, the 30-year mortgage is the most common. A 30-year mortgage will carry a higher interest rate than a 15-year or 20-year loan, and you’ll pay more interest over the life of the loan, but your monthly payments will be lower than the other options. This means you could borrow more money for the same monthly payment as a 15-year loan, and ultimately get more house – it will just take longer to pay it off.

What are the Advantages of a Fixed Home Loan?

Fixed rate mortgages carry a number of advantages over the adjustable-rate loans, including the following:

  • Fixed interest rate: With a fixed mortgage, your interest rate is locked in. It will not increase over the life of the loan.
  • Fixed monthly payment: With a stable interest rate locked in, your monthly payment also becomes fixed and will not change during the loan period.
  • Easy comparison: Stable interest rates and terms allow you to easily compare the offerings of a variety of mortgage lenders to find the financing package that best meets your needs.
  • Using low rates: When interest rates drop, you can lock them in with low fixed rate home loans that take advantage of those interest rates for the duration of the borrowing period.
  • Flexible mortgage term options: Fixed loans can often be structured to allow borrowers options for mortgage acceleration, redraws, underpayments, and payment holidays, offering flexibility for consumers depending on their financial situations.

What are the Disadvantages of a Fixed Home Mortgage?

While the peace of mind afforded by fixed rate home loans is attractive to home buyers, there are some disadvantages as well:

  • Higher interest and payments: Adjustable rate loans utilise lower interest rates, so fixed rate loans pay more in interest and have higher monthly payments.
  • Difficult qualifying: Because the monthly payments are higher with fixed rate loans, they are generally more difficult to qualify for when interest rates are high.
  • No introductory period: Adjustable rate mortgages typically include a fixed introductory period, which is not the case with fixed rate loans.
  • Locked in: While the locked rate is an advantage when interest rates remain low, with a fixed rate loan you can’t take advantage of falling interest rates without re-financing the entire mortgage.

There are a number of advantages and disadvantages to a fixed rate mortgage loan. Ultimately, you will need to choose the type of loan that best suits your financial situation and allows you to purchase the home that is right for you.

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